Beyond the reach of the whip

By virtually all measures Chinese overseas investment is booming right now with new projects and deals being signed on a daily basis across the globe. At the same time a quiet yet highly significant shift is underway in the pattern of Chinese overseas investment.

This drive to invest abroad has been traditionally led by China’s state owned enterprises (SOEs) but now it is increasingly the private sector which is taking the lead rather than the SOEs. The People’s Bank of China have made it more straightforward to invest abroad by easing the restrictions on capital outflows, plus there is a growing desire by these same firms to step outside of their domestic market and try their luck overseas. The other less spoken about dynamic is that many firms see overseas operations as a hedge against a downturn at home.

From the perspective of the Chinese state this is of course in one sense an encouraging sign as it demonstrates the ambition and success of home grown firms, but it also means less control over these company’s activities overseas. Ventures in private hands are less pliable in terms of achieving the Party’s wider foreign policy goals, or as the Chinese proverb goes ” they lie beyond the reach of the whip”. Although running a major business in China without major Communist party ties is a no no, and anyone stepping out of line and annoying the leadership are likely to be met with a corruption charge or two. Of course overseas any issues like this might be less noticable, but it is fair to say the Beijing leadership still have a lot of leverage over private firms.

Host countries for Chinese investment might seemingly prefer private Chinese firms, fearing the influence of the Communist party behind SOEs, but they would do well to remember that the much vilified Huawei electronics firm is privately owned and it has been accused of spying on foreign countries by including spyware in electronic devices and they have been barred from operating in the US as a result.

Much of the recent charge to expand abroad has been led by tech and telecoms firms which being so new to the scene do not have history of being state owned. Recent deals include Huaxin buying French firm Alcatel-Lucent, China Mobile have ploughing money into operations in Pakistan and Thailand as well as other Asian countries. Alibaba the internet shopping giant has embarked an international shopping spree in an attempt to become a global internet player, rather than one focused on just China.

As well as major Companies like Wanda, Alibaba and Shandong who grab the headlines, below the radar there are hundreds even thousands of smaller firms expanding overseas. From medium sized construction firms previously focused in Xingjian or Yunnan province now expanding into Central Asia to work on the Belt and Road Initiative to small trading companies who go from shipping products abroad to setting up operations overseas and sell directly to the consumer.

Watching this trend it seems to confirm the stereotype that state owned firms are more interested in construction, natural resources and heavy industry, while the private sector is concerned with tech, property and consumer goods.

In another twist is that Chinese governments both national and local are encouraging outbound investment by SMEs with a loosening of capital restrictions. Many SMEs are taking the opportunity to do exactly that, unshackled from these constraints these firms could make a major if less headline worthy impact overseas.

Overseas this could also mean a more flexible approach to ownership by Chinese firms as in considering more joint ownership and partnerships with other countries firms rather than the Chinese firm just taking 100% ownership with little outside involvement.

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